WSJ: Investors Brace For U.K. Government Bond Selloff

By Johanna Bennett

The U.S. bond market isn’t alone feeling the sting from what their own central bankers do, or don’t say.

The WSJreports today that some investors are bracing for a selloff in U.K. government bonds as a new central bank chief there prepares to shift the Bank of England to a more transparent but less accommodative monetary policy.

On Wednesday, the Bank of England is set to start offering “forward guidance” on interest rates. This marks the bank’s first big move under new governor Mark Carney.

As the WSJ reports, that “spells trouble for the £1.4 trillion ($2.15 trillion) market for U.K. government debt, known as gilts, which has rallied in past years thanks in part to demand from the BOE.”

Gilts were spared the recent global bond selloff. Yet prices of 10-year gilts fell on Monday, pushing yields up to 2.46%. Yields were about 1.70% in November, when the BOE finished its last round of bond buying.

The yield on the 10-year U.S. Treasury note was at 2.65% Monday afternoon.

The WSJ story reads:

The shift at the BOE comes as central bankers around the world are grappling with how to extricate themselves from a strategy that caused their balance sheets to balloon, while keeping a lid on rate expectations at the same time. Members of the BOE’s Monetary Policy Committee have questioned the efficacy of further bond purchases, which have already injected £375 billion into the U.K. economy.

Gilts maturing in five years or more are likely to bear the brunt of the selling, because that is where the BOE has focused its buying, investors and analysts say. The effect on short-term gilts would be less pronounced, as low interest rates would keep that part of the market buoyant.

The BOE has accounted for two-thirds of the gilt market’s expansion since March 2009, when the BOE’s first round of quantitative easing was launched, according to Citigroup.

With the BOE unlikely to add to its balance sheet, the U.K.’s Debt Management Office may have to pay up to lure investors, given that its borrowing needs are forecast to remain hefty. The U.K. estimates it will issue £156 billion in debt this year, slightly more than in 2012.

All is not lost. The BOE can still step into the bond market if the U.K. economy stumbles. Meanwhile, some investors argue that the U.K. economy isn’t yet strong enough to justify investors climbing out further on the risk curve.